Pay Yourself First Challenge

What a week! Three major projects have kept me sprinting since January, and ALL wrapped this week!

We've finally chosen interns for my company. I presented a talk I've been developing for months, for a packed crowd of 300 people at the Web 2.0 Expo (on "sparking a crush" -- how to get people to fall in love with your site). And I'm writing my final blog post for the Pay Yourself First challenge!

Seth and I wanted to go out and have a big celebration dinner -- and tossed around a few of SF's finest -- but we ended up here at home, snuggling on the couch, eating a frozen pizza and watching a DVD we've seen a few times... and we couldn't be happier.

It's amazing how much can happen in 6 months -- some of the other challengers have had some major life changes -- but looking back, all I can say is, we've been incredibly blessed.

Through this diagram, which I created while procrastinating to analyze the reasons for my procrastination, I determined that the love of money is indeed the root of all evils:

Tired < Only 5hrs Sleep < Caffeine < Free Coffee < Can't Resist < Love of Money (the root of all evil)

Although wanting to save money is generally a good thing, I often find myself having to fight off the "starving student" mentality -- the tendency to hoard money, food and stuff like there's no tomorrow.

When I was in college and not on a meal plan (because they're usually a waste of money!), I took up every free food offer I could get! Fortunately (or unfortunately for my diet!), when you're in school, free pizza is the lure for just about everything, so I was able to eat for free quite a bit. (The rest of the time I just ate Ramen or Subway using my student discount card...)

Unfortunately, I'm still programmed to think that way. I don't actually think the mentality came from college. It's kind of a natural side effect of being so careful with money. (I've also heard it called the "Great Depression" mentality or having a "spirit of poverty" -- or just being stingy.)

I tend to penny-pinch and don't spend money on things I should sometimes (like getting a haircut). I have a hard time not counting the cost when treating others. I'm irrationally drawn to free things: When there's free food at work, I often end up eating too much; when there's free schwag at a conference, I can't resist taking it. So I end up eating food I don't need and filling our closets with cheezy t-shirts we don't need as a result.

The reality is, I have all that I need and more -- I always have -- and I don't need to cling to things. I don't need to eat all the cookies at work -- there will be cookies again some other day. I don't need to worry about what I'll eat or drink or wear. I don't need to extract the maximum utility out of every dollar.

More often than not, I just need to let go.

After all, as a Caedmon's Call song puts it:

This world has nothing for me, and this world has everything.
All that I could want and nothing that I need.

In the midst of a streak of 12-hour days, I've still had a little time to find ways to maximize our savings, both for now and for the future:

I put our retirement savings (Roth IRAs) on auto-pilot -- for the next 10 months, Seth and I are each automatically transferring $500 each into our Roth IRA accounts in order to hit the $5000 maximum for 2009. It will go into Total Stock Market and Total International Market index funds, which are getting increasingly inexpensive these days. If you don't know about Roth IRAs, they're one of the best ways to save for retirement. It's basically a savings account that you can put up to $5000 in every year. Unlike 401k's, you can take the money you put in back out at any time, without penalty, and you can have a lot more control over how it's invested. Unlike Traditional IRAs, the money you put in is after-tax... which means you don't get a tax break now, BUT you will get an even bigger tax break later -- because when you withdraw your retirement earnings years from now, when that $5000 has turned into $50,000, you don't have to pay taxes on it! You can learn more about IRAs here: http://www.fool.com/money/allaboutiras/allaboutiras.htm

I adjusted our withholding to make sure we won't get a huge tax refund next year. What, you say? Isn't getting a huge tax refund a good thing? After all, TurboTax and H&R block all advertise "Get your biggest refund today!" But guess what? That's just silly and deceiving. You get tax refunds when you've OVERPAID your taxes all year by not optimizing how much you're paying. That means you've loaned the government money all year that you could have invested or saved for yourself all along. So if you get a huge refund this year, consider adjusting your withholding (ask your HR person at work for help). Sure you won't get a fat refund next year, but you'll get a bigger paycheck every month, and money now is worth more than money later!

I finally got my W-2's this week, so my next blog post will probably chronicle our adventures using TaxAct -- TurboTax's MUCH more affordable cousin (TaxAct is currently $16.95 for both federal and state vs. TurboTax's $25.95 for state alone), that makes filing your tax return as easy as answering a bunch of questions. We've used TaxAct for years, and it's been totally reliable. We've even done taxes in TurboTax, TaxCut, AND TaxAct just to try them out and compare, and TaxAct was just as good.

I discovered that Bank of America and Borders Rewards both offer customers access to some massive discount programs for online retailers: Bank of America's "Add It Up" program offers customers up to 20% cash back on purchases from almost all the major online retailers, from the Apple Store to Buy.com (my main electronics destination). Borders Rewards offers members access to similar discounts and offers. Everyone is competing hard for your business in this economy, so that means there's a lot more discounts out there, you just have to go out and look for them.

I've been saving money on food. For one thing, I've been eating a lot of free lunches at work. That's the nice part about working long days and nights and having lots of client meetings. We've also been sticking closely to our food budget -- we splurged one weekend, so the next weekend, though it took some discipline, we made up for it by not going out to eat at all, and instead making ice cream and other yummy food together at home.

So that's my weekly savings wrap-up! I hope it will set you onto a few ways you can optimize your savings, both today and for the future, as well!

Wrapping up my series about how design can help people save money (a.k.a., how I, as an interaction designer, could help others save), here are the last two principles:

Equip the mind to control the flesh.

Arm the mind.
Humans are conflicted beings -- "the spirit is willing but the flesh is weak." When we're feeling rational, we try to find ways to reign in or control the flesh -- we put our alarm clock on the other side of the room, we rid our houses of chocolate and sweets, and even freeze our credit cards in ice water to force a waiting period before making impulse buys (Google it!). The mind wants to be able to control the flesh. Stickk.com arms the mind to do so by letting people create goals and set up their own punishments/rewards for meeting these goals.

Leverage social nudges.
Everyone's been talking about the energy bill that compares you to your neighbors. But less known is the "boomerang" effect that it had. According to Nudge, when people were told their power consumption was less than their neighbors, below-average users actually increased their use. But when the message was accompanied by a smiley face icon, this effect disappeared. If even an icon of social approval or disapproval can make a difference, real social pressure could be even more powerful. What if people could hold themselves accountable by keeping public spending logs, the way TheDailyPlate lets people keep public food logs?

Make saving as easy as spending.
If it were as easy to save as it is to spend, the mind wouldn't have to plot against the flesh so much! Charities know that the checkout line can be a powerful place to solicit donations -- adding a few dollars to your grocery bill to provide milk to school children feels painless. What if there were a way to leverage these "open-wallet" moments to prompt savings? Instead of asking if you want cash back, what if the register prompted you to transfer $20 to savings?

Architect complex choices carefully.

Complex financial decisions -- like setting up a 401k -- are especially challenging and full of hurdles. People procrastinate about joining 401k plans because they don't know how much to set aside, and once they do, they don't know how to allocate it. When they do set it up, people are often unwittingly influenced by the language used, the options offered and the order in which they are presented. For example, when offered a choice between just two funds -- an all bonds fund and an all stocks fund -- people tended to engage in what Nudge calls, "naive diversification" -- splitting their money 50/50 between the two. "Choice architecture" can have significant and costly impacts on people's futures, which means there is a lot of responsibility to get it right. Nudge offers much more detailed insight into architecting complex choices.

These are some of the most interesting principles I've been reading about, thinking about or uncovering through work on consumer-facing finance tools. If you have other ideas or principles you can share, I'd love to see them in the comments!